Open letter to Finance ministers

CARP members are calling on you to move forward on your 2010 promise to improve retirement security for all Canadians. In June 2010, the federal provincial and territorial finance ministers acknowledged that Canada’s pension system needed reform and that government had a role to play by proposing a pooled pension arrangement together with a modest enhancement to the Canada Pension Plan. CARP hailed the combined measures as an important step in helping people save for their own retirement and has since presented our recommendations to improve these measures at various consultations and parliamentary committees.

More than two years later, only federal legislation to establish the Pooled Registered Pension Plans has been enacted which applies only to federally regulated workplaces. Provincial legislation is required to allow all other workplaces to establish any such pooled arrangement. In addition, no progress has been announced on the promise to enhance the CPP.

Your meeting later this month presents an opportunity for the provinces acting together to improve on the current parameters of the PRPPs as well as to act on enhancing the CPP. A consensus is necessary to ensure national uniformity and portability of the provincial PRPPs and a virtual consensus is required to change the CPP. This gives real leverage to those provinces which want to better address the retirement savings needs of their constituents.

Canadians are not saving enough for their own retirement and are not taking advantage of the voluntary savings vehicles now available. RRSP contributions amount to just 5% of the available RRSP tax deferral room. The challenge is to change that – either by mandating it or by designing a savings vehicle that is so attractive that substantially more people save, and save more than they do now.

CARP has called for a universally accessible retirement savings vehicle that will substantially increase the amount of savings as well as offer a reliable pathway to an adequate retirement income. The CPP succeeds in part because it requires mandatory contributions from both employers and employees. And the CPP pension, while not sufficient on its own to provide an adequate retirement income, is at least predictable. Any supplementary plan besides the CPP needs to reflect some or all of its advantages.

As currently structured, the PRPPs hold the promise of encouraging more Canadians to save for their own retirement by offering to pool risks in large funds with professional management– all to provide some advantage over group or individual RRSPs with lower costs and better returns. The auto-enrolment design, with a voluntary opt-out, and payroll deductions will get employees enrolled but cannot ensure that they contribute. The Quebec proposal to mandate enrolment of all employers with five or more employees takes this even further. The question is whether all this is enough to make a difference, to convince significantly more people to save than are doing so now.

Missing from the PRPP design is any incentive for employees to actually contribute materially – a necessary pre-condition for their retirement security and for the business case of the administrators getting set to offer the plans. And younger workers particularly need an immediate incentive to save rather than consume and they are the ones who stand to benefit the most from any realistic pension reform.

We polled CARP members on whether all of the PRPP’s stated advantages would be enough to encourage more of them to save for their own retirement – or would have done if PRPP type vehicles were available when they were working. Their answer was no; their preference was for a CPP-like vehicle, the most important aspect of which was a material employer contribution, overtaking even the promise of lower fees or a target benefit design – which the PRPP does not offer.

In order for the PRPP to be a true “pension”, it must provide an adequate income stream over the lifetime of the retiree. The PRPP is strictly a defined contribution plan which does not offer a pension stream. The only option is to buy an annuity with the balance in one’s own account at the time of retirement which is not an adequate answer. In their enabling legislation, the provinces should require investing or annuitizing methods that can ensure a true pension stream, much as are utilized by the CPP and other large public sector plans.

A modest CPP-enhancement remains a necessary part of the entire measure to improve retirement security. CARP’s pension reform recommendations target the approximately 8 million working Canadians who have no workplace pension plan, of whom 3.5 million are middle income earners and 4.9 million earn less than $30,000 per year. All could benefit from an improved PRPP offering but the lower income groups will benefit most from a CPP enhancement. Fears that even modest mandatory employer contributions would “kill jobs” have never played out even with much more significant increases in CPP contribution rates in the past.

Finally, the trust factor is an important driver in financial decision making. At present, the lack of a fiduciary obligation on the part of financial advisers, lack of redress in the event of misconduct and apprehension about high investment fees all contribute to the lack of investment savings by the average Canadian. This also explains why CARP members prefer a CPP-like vehicle, regardless of whether the contributions are mandatory or voluntary.

CARP members are sceptical that the private sector would offer reliable investments at low cost – despite all the assurances that have been expressed. There is evidence that their scepticism is warranted. A similar Australian measure was found to have increased savings since enrolment was mandatory along with employer contributions but the net earnings were low because the net after tax investment earnings had been reduced by 40% over the 12 year review period due to fees paid to industry.

Therefore, provincial legislation should set a fee cap or allow competition from public sector administrators like the CPP, teachers’ funds and other public sector pension administrators.

In summary, CARP recommends that:

Provincial enabling legislation for PRPPs:

Set a fee cap

Require employer contributions

Require target benefit design

Concrete steps be taken to implement the promised CPP enhancement

CARP members are relying on you to take the necessary steps to ensure retirement security for all Canadians. Any measure that you ultimately adopt must be designed to provide a safe, affordable, reliable avenue for Canadians to save for an adequate retirement income that is seen to be so and therefore taken up by a sufficient proportion of people to materially improve on the status quo. We believe that a modest CPP enhancement together with an improved PRPP offering – with a fee cap, employer contributions and target benefit design – can meet that challenge.